Doubleline Capital founder Jeff Gundlach warned that the flattening yield curve could become a concern for US economic growth when two and three-year notes yield about the same, and the price per barrel of WTI crude oil plunges into the $30s, he said during a phone call with a Reuters reporter.
The last time the spread between two- and three-year yields held below 10 basis points was around the time former Federal Reserve Chairman Ben Bernanke announced the beginning of Operation Twist and then QE3 in late 2012.
Gundlach, who doesn’t anticipate a recession in the near term – only a correction in US stocks over the summer – added that “there’s no hard data that you could point to that signals recession.” Typically, short-term bond yields are more sensitive when central banks raise interest rates.
Though, as Reuters noted, this doesn’t mean economic growth is exploding.
Known on Wall Street as the Bond King, Gundlach also said he is becoming more positive on international equities over U.S. stock markets because the Fed is raising rates with "quantitative tightening on top of it with its plans to shrink its balance sheet," according to Reuters.
"Lower CPI (Consumer Price Index) in the next couple of months will be a cold bucket of water for the Fed tightening dreams," Gundlach said. "Commodities are super weak, with the dollar down year-to-date, no less."
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During his latest monthly webcast, Gundlach noted that the short-volatility trade is looking incredibly crowded, and said traders "should be raising cash today” so they can go long volatility - short the S&P 500 and take advantage of an impending correction.
"It's a trade that's made a lot of money and its very, very crowded, which suggests to me the days of low volatility are numbered," he said. We "probably won't see it continue through year end."
Aside from an imminent vol spike, Gundlach also went off on a political tangent and summarized his views on the ongoing drama in DC, saying "the establishment: in Washington is trying to undermine Trump by running out the clock on his administration. “They’re really just trying to wait Trump out, trying to obstruct his agenda as much as possible,” Gundlach said quoted by Bloomberg. “Small change is what they’re looking for.”
He called the political charade taking place in DC “a sideshow or entertainment" and said the US political conflict is “rope-a-dope,” after the strategy used by Muhammad Ali to wear out opponents. It remains to be seen if the Democrats, or Trump, win this particular boxing match.
The Treasury yield curve flattened on Wednesday, with 30-year yields down two basis points, and two-year yields up one point. WTI, meanwhile, tumbled to $42 a barrel.
If you missed out on Gundlach's presentation, you can read it in its entirety here: